Extreme Turbulence Ahead: How Real Estate Investors Can Prepare

Posted at October 11, 2022 Posted In Equity Insights Newsletter

If you’re following macro-economics, you know the “captains” of the financial world are voicing alarm lately …

Expect pain – Jerome Powell, Fed Chair

A 2008-style liquidity crisis + recession is a big threat now” – Jim Rickards, Author/Economist

That hurricane is right out there down the road, coming our way … you better brace yourself” – Jamie Dimon, CEO JP Morgan Chase

In the bond market, we’re experiencing extreme turbulence.

Here’s a few highlights from recent financial news …

Recently, MBS prices (Mortgage Backed Securities) were down 400+ bps in September alone! That’s massive. Bond prices drop = yields / rates rise.

Liquidity is drying up in the financial system. Quality collateral to support the flow of capital is scarce. Lenders are tightening their guidelines.

The Fed is hiking rates at the fastest pace in 40+ years. If you’ve seen the power of easy-money to stimulate growth, consider the power of the flip side toward growth destruction. GDP is not impressive right now.

Major companies in various industries are announcing coming layoffs.

Inflation is very obviously not transitory. At the same time borrowing costs are rising and economic growth is slowing, prices continue to press higher.

The Big Question: What’s an investor to do?

While we’re not financial advisors, here’s some smart ideas we’re learning by watching our clients make moves.

#1 – Harvest gains when you can.

Cash-in your equity. Beef up your liquid reserves. Markets propped up by cheap debt (rather than rising incomes) have experienced decades of hot air build-up as interest rates had been falling. Now interest rates are rising at the fastest pace in history. Looking at historical charts, from July 1980 to Nov 1981, we saw a 6.19% increase in mortgage rates. From Sep 2021 to Sep 2022, we saw a 3.83% increase. You may think it was worse before, but consider this: In the 1980’s, rates multiplied by a factor of 1.4X per year; right now, we’re experiencing mortgage rates that have multiplied at a 2.3X factor in a single year! Cash-in some chips in over-valued markets and shift to markets where local household incomes support local housing rents and/or prices (with the current mortgage rate reality!).

#2 – Put on your oxygen mask.

Oxygen = Cash Flow. Cash flow feeds all vital functions (including funding your grocery budget). Consider cash flowing assets over value-add projects. Stress test what happens to your existing portfolio and family budget if you or your spouse lose your job. Stress test what happens to your portfolio if a percentage of your tenants lose their job and you have turnover and stagnant or depressed rents. Hindsight’s 20/20 … so put yourself in possible future outcomes and imagine what you “would’ve, could’ve, should’ve” done. Consider doing it.

#3 – Check on your friends. 

In tough times, you’ll need help at times and will want to be connected to others who are strong and prepared too. Invite them to gather and learn with you. (For those near Phoenix, AZ, join The Real Estate Guys™ Local Investor Mentoring Club).

#4 – Carry a floatie

Precious metals are a proven hedge against currency devaluation. As currencies lose air, hard metals retain their buoyancy / purchasing power. Yes, “floating” is not the path to riches. But, it sure helps you keep your head above water. Savvy investors (and countries!) have been stockpiling these hard assets.

#5 – Keep your eyes open for deals.

Opportunities are popping up for those who are aware, prepared and level-headed enough to act when others are hiding in fear. Unprepared owners may find themselves in a pinch and need your help … If you’re ready, willing and able to help, you’ll be rewarded for win/win solutions. Get in position to be of service (see #1).

#6 – Be Patient.

There’s no get rich quick scheme. Play the long game. Watch your metrics and carefully underwrite every deal you’re considering. It may be tempting to sit out of the game right now if you’re comparing today’s returns to what you were getting when rates were in the 3’s. While the diminishing purchasing power of your cash could be considered your “insurance cost” in the short term, if you sit in cash too long, you’re nearly guaranteed to lose. Keeping your balance in stormy seas is key. With the funds that you allocate for investment, re-calibrate your expectations … Don’t chase unrealistic “home-run” returns with aggressive “everything must go right” strategies just to hit the ROI’s you’ve been used to. Be thankful for the slow n’ steady winners in stable markets that’ll get you to the next base.

#7 – Measure your wealth in real assets, not dollars

How many houses? How many coins? How much farmland? How much food? It’s easy to be fooled into thinking you’re doing well watching your dollars grow on your balance sheet, but when those dollars are buying you less and less and less …. You can look like you’re winning, when you’re actually losing. Don’t let the system fool you out of real resources and real wealth. Don’t trade good assets for cash. Trade cash for assets that offer value to the world for which they’ll pay you … Whether they pay you in cash, food, stamps, gas, coins or digits on a screen, it doesn’t matter. No matter what the currency of the day is, there’s always an economy.


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